Q1 2022 Meta Financial Group Inc Earnings Call
Ladies and gentlemen, thank.
Thank you for standing by and welcome to the meta financial Group Investor Conference call for the first fiscal quarter of 2022 during the presentation. All participants will be in a listen only mode. Following the prepared remarks, we will conduct a question and answer session.
A reminder, this conference call is being recorded I would now like the turn the conference call over to Justin Chen Vice President of Investor Relations and financial reporting.
Please go ahead.
Thank you I would like to welcome everyone to the <unk> Financial Group Conference call and webcast, our CEO , Brett Farr, President Anthony Charrette, and CFO Glen Herrick.
The results of our first fiscal quarter 2022.
After which we will take your questions.
Additional information, including the earnings release and Investor presentation may be found on our website at Magnum financial groups Dot com.
As a reminder, our comments may include forward looking statements. These statements are subject to risks and uncertainties.
Good cause actual and anticipated results to differ.
The company undertakes no obligation to update any forward looking statements.
Please refer to the cautionary language in the earnings release Investor presentation and in other filings with the Securities and Exchange Commission, including our most recent filings for additional information covering factors that could cause actual results to differ materially from the forward looking statements.
Additionally, today, we may be discussing certain non-GAAP financial measures on this conference call.
References to non-GAAP measures are only provided to assist you in understanding that as results and performance trends.
Reconciliations for such non-GAAP measures are included within the appendix of the Investor presentation.
Now I would turn the call over to Brett Farr.
Thank you everyone for joining meta financial groups first fiscal quarter of 2022 earnings call.
We are pleased to have achieved solid results again this quarter.
Net income for the quarter was $61 3 million, earning.
Earnings per share of $2 was well above the prior year's 84 cents, reflecting the benefits of two substantial non operating events.
First as I mentioned last quarter, we plan to fully wind down our community bank balances to zero by year end.
I'm pleased to say that during the quarter, we sold the remainder of the legacy community Bank loans in December wrapping up a significant phase in our multiyear shift towards higher return earning assets.
Second we announced in December an agreement to sell the meta names and trademarks for $60 million of which we received $50 million in the fiscal first quarter.
This agreement aligns well with our brand strategy review that we began during the 2021 fiscal year.
We plan to develop a new corporate name and brand that represent the company's significant evolution. During the last few years, which has enabled us to better fulfill our vision of financial inclusion for all.
We expect to announce a new company name in the coming months and to be wrapped up with all the rebranding activity by the end of the calendar year.
Returning to operating results. We made continued progress during the quarter and the three strategic initiatives to drive our business and financial results.
First we increased our base of lower cost stable core deposits with the average deposits growing 9% compared to the first quarter of last year.
We were also able to drive our cost of funds lower as we further reduced our overall funding cost or eight basis points.
This contributed to our net interest margin that was again over 450 basis points.
Next we continue to optimize our interest earning asset mix by emphasizing higher return assets demonstrated by the $375 million or 15% year over year growth in our commercial finance loans and the successful completion of the sale of our community bank loans.
And lastly, we made progress towards improving operating efficiency to expand our core earnings from our operations.
We remain focused on driving simplification and optimization of existing business platforms as well as investing in improving our technology to help drive efficiencies and operating leverage.
Now, let me turn the call over to our President Anthony Charrette to discuss matters efforts to improve operating efficiencies and provide updates on our lines of business.
Thank you Brett.
With our vision of financial inclusion for all and focus on business simplification.
For your attention this quarter to opportunities.
That has the promise to increase revenue.
As we become an even larger banking as a service provider.
This focus refines, how we use innovation to enable new products and solutions with partners and developed enhanced internal capabilities using a customer centric approach that more closely aligns with our partners' and customers' needs.
This will help us accelerate our focus on driving cross sell across our company.
Leveraging our existing partnerships and strength of our businesses.
During the quarter.
We were pleased to have completed a three year extension of our existing agreement with H&R block.
This agreement adds valuable new financial product offerings and capabilities for customers.
Of note earlier this month H&R block to introduce Bruce <unk>.
Mobile banking platform that features a spending account with an attach debit card.
This innovative product design to help consumers better manage their financial resources and meet sprinkles is powered by <unk> Bank.
Spruce is another great example of <unk> ability to provide successful and reliable banking as a service capabilities to partners and their customers.
Banking as a service has always been a core feature of our business model.
We continue to see a robust pipeline as fee income generating opportunities within our payments division.
As long as opportunities to drive incremental revenue through cross selling banking as a service solutions across our businesses.
Our commercial finance division performed well during the quarter.
The commercial finance loan portfolio totaled $2 8 billion at December 31.
An increase of 3% on a linked quarter basis.
A 50% increase year over year.
We continue to see strong demand for our commercial finance loans and leases with a healthy pipeline across portfolios.
Turning to credit quality total.
Total nonperforming loans and leases as a percentage of total loans and leases improved 36 basis points from the prior quarter to 116%.
This was largely due to the community bank loan sales and an improvement in our tax services portfolio.
Likewise, our total outstanding substandard and doubtful loans at Liza declined 81 million for the prior quarter.
Merely driven by the sale of the community banking loans.
The allowance as a percentage of loans and leases dropped from 189% in the prior quarter to 184% for the current quarter.
Overall, our net charge offs were minimal for the quarter totaling just $1 1 million helped.
Helped in part by $2 6 million in recoveries from our Tech services portfolio.
Now, let me turn the call over to Glen Herrick, our CFO to provide an overview of our financials.
Thank you Anthony and good afternoon, everyone.
For the quarter ended December 31, net income totaled $61 $3 million or $2 a share an increase of $33 million from the first quarter of fiscal 2021, when adjusting for the impact of the gain on sale of trademarks core net income from the quarter.
Totaled $23 $9 million or <unk> 78.
<unk> per share as Brad noted, we had two significant transactions during the quarter, including the agreement to sell them out of names and trademarks for $60 million.
We recognized $50 million of those proceeds as a gain in the first quarter and anticipate recognizing the remaining $10 million upon completion of the rebranding activities, which we expect will be completed by the end of this year.
We estimate utilizing between 15 and $20 million of the sale proceeds toward rebranding efforts and anticipate using the remainder of the funds for general corporate purposes, including tax efficient capital allocation consistent with our previously discussed strategy.
As part of our efforts to optimize the earning asset mix, we sold the remaining legacy community bank loans, completing the wind down of that portfolio.
These transactions generated a net favorable pre tax impact of approximately $3 9 million for.
For the first quarter when combining the loss on sale of loans of $8 $4 million.
And a $12 3 million dollar allowance release.
In addition, we expect the elimination of the community bank portfolio won't contribute towards improved efficiencies moving forward.
We generated net interest income of $72 million, an increase of 9% from the prior year net.
Net interest income benefited from strong lower loan and lease growth and continued improvement in the earning assets and liability mix.
Quarterly average loans and leases grew $211 million or 6% compared to the prior year.
Driven by growth in our loan portfolios, partially offset by the wind down of the community banking portfolio.
Cost of funds for the first quarter improved eight basis points compared to 15 basis points from the prior year.
As the financial markets prepare for a potential rise in interest rates, we believe our balance sheet is well positioned to benefit given our stable low cost funding base.
Non interest income.
Increased to $87 million for the quarter and included the $50 million gain on sale of trademarks.
The $8 $4 million loss on sale of the community bank loans, and a $3 $3 million negative mark to market adjustment of our equity investment in moneyline.
As a reminder, last quarter, we recognized a net unrealized gain of approximately $4 million on our moneyline investment after they completed their spec process.
And became publicly traded.
Noninterest expense totaled $82 million for the first fiscal quarter of 2022, a decrease of $11 million from the prior quarter and in line with the range, We noted last quarter.
We are seeing an increase in compensation expenses due to FTE growth in the current employment environment.
In addition, we do expect to see an up tick in expenses in the coming quarters as we utilize some of our gain on sale of trademark proceeds towards our rebranding efforts.
Turning to our share repurchase program during the first quarter of fiscal 2022, we repurchased one 7 million shares at an average price of $58 97.
And in January have purchased an additional 130000 shares at an average price of $61 and 26 through January .
<unk> 20th.
As of January 20th we had approximately $5 5 million shares remaining under the repurchase program. The recent purchases continue to reflect the momentum of the business and confidence in the company's outlook and growth trajectory.
The company remains well capitalized with a regulatory leverage ratio for the bank of eight 5%.
As compared to eight 7% the prior quarter overall, we continue to make great progress against our key strategic initiatives.
<unk> are reflected in our financial results.
That concludes our prepared remarks, operator, please open up the line for questions.
Second lien.
If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by Tim again to ask a question. Please press star one I'm, Sorry reminder, if youre using a speakerphone. Please remember to pick up your handset before asking your question.
We will pause briefly to allow questions to generate in Q.
The first question is from the line of Frank sure Adobe with Piper Sandler You May proceed.
Good afternoon.
Okay great.
Great I just wanted to.
I just wanted to start with.
<unk>.
So consumer finance book.
So I'm not mistaken grew pretty significantly off of <unk>.
Based on that presented basis linked quarter.
And I just wondered if you could remind us your thoughts on.
Where do you want to grow that too and sort of what is the incremental consumer product that went on the balance sheet in the quarter.
Yeah.
Yeah.
Yes.
This is Anthony.
Your question was around the consumer book correct.
Correct.
Yes, again, we are as we talked about in our prepared remarks.
We are focused on our banking as a service offerings and will continue to do so.
Our consumer.
Our consumer book consist of our consumer loans and also through the consolidation of our consumer solutions group.
For US now, but it also includes our Texas Division as well.
Tax season is coming up and so we're still a wait and see approach to that.
And talking to our teams within the Pac Division, we're off to a good start but as it relates to our consumer loans again.
Utilizing our banking as a service model here.
We believe that that will continue to grow.
Okay.
Frank.
Yes.
It's coming off a small base.
On the consumer loans Youll see on balance sheet are going to be a pretty small for the foreseeable future on a relative basis, we will use those strategically as Anthony said without.
Taking on a lot of.
A lot of risk tends to Nancy.
Big allowance build for consumer finance either this quarter.
Right.
Yeah.
These balances represent.
Partnerships.
With with partners that you do business with on the other side of the balance sheet.
Tori side or is it a different set of partners for the most of them.
So this is Brian this is Ed.
Yes.
Alright, great.
Yes.
Thank you.
Our marketplace lenders.
Net.
Are not currently in the payments business, but there is at least one that has now crossed over and he's doing both.
And the pipeline is filled with people that want to do both.
Okay.
Okay, Great and then on the balance sheet.
Yes, there was.
Significant growth into the into.
We ended the period, which I believe is just seasonality I'm just wondering if you could remind us as you look out over 2022.
Your thoughts on.
Balance sheet side on an average basis through the remainder of the year.
So this is Brett so I mean, we're going to continue to monitor and manage the balance sheet.
And we're.
We're not interested in rapid balance sheet growth, obviously as deposits come to us we will our deposits our balance sheet has been swollen a bit.
Because of some of the government stimulus. So I think some of those things will continue to run down, but I wouldn't expect much growth from where we are right now.
Okay.
Got you and then.
Just lastly for me on.
Glenn I think you've mentioned in the prepared remarks.
Some.
Higher expense going forward just wondering if maybe you could give any color on your expectations for.
The expense the normal expense base outside of I guess the tax season stuff.
Brian go ahead.
Yeah.
Yes, I'm, sorry, Brad our line dropped.
While materially there so what was the question.
Just on expenses I think you mentioned during your prepared remarks, maybe some some higher expense or some things going forward just wondering if you could.
Quantify that at all.
Yes.
We got back to the kind of core run rate, we had guided last quarter.
Yes.
We will have higher expenses, obviously during the March quarter for tax taxes with the seasonality. There are a lot of that is variable. So it'll go up as much as <unk>.
Tied to our revenue.
From tax season.
Side of that I would expect core expenses.
Grind, a little bit higher here, but that will be because of higher revenues.
Expense growth at a lower rate than revenues. So we can generate positive operating leverage.
Outside of core expenses.
We will be.
Incurring expenses for our rebranding efforts and then absolute expenses, Thats, where youll see the bulk of that $15 million to $20 million being spent over the rest of the fiscal year.
Okay and then.
You might have mentioned on the call, but the $10 million.
Left the gain.
You got that.
When in a year's time is that how it works yes.
Widespread.
Prior to two year end.
Once we fill the rest of our commitments.
About the.
The current use the transition period for the matter name.
And then we will be able to recognize or realize those last $10 million sitting international account right now.
Alright. Thanks.
Okay.
Thank you Mr Chair.
The next question is from the line, Steve Moss with B Riley Securities You May proceed.
Good afternoon.
Maybe just.
On the other part of the loan portfolio here with the commercial finance business kind of curious how you guys are feeling about growth and the pipeline there.
Yes. This is Anthony we feel good about our pipeline and commercial finance.
We continue to see strong growth, we've got a full pipeline.
That growth was within our underwriting criteria that again.
Commercial finance loans are up 15% year over year. So we feel good about our pipeline this year.
Yeah.
Okay.
And then in terms of the just thinking about credit costs here I mean, obviously, some moving pieces with community bank sale, but.
Charge offs pretty low here for the quarter.
I'm just kind of curious as to how you guys are thinking about.
Credit costs, normalizing or just any timeline or sense around that.
Yes. This is bret.
The business that we're in we manage collateral very closely so we have.
Limited losses, and we're pretty good at it you get the occasional events that's more of a fraud related thing so occasionally youll see something lumpy, but.
We've had a very good run rate and we would expect that run rate to continue with a book we have.
Okay.
Alright, Thank you very much I appreciate all the color.
Thanks, Steve.
Thank you Mr Ma.
Again, if you would like to ask a question. Please press star followed by one on your telephone keypad.
Okay.
Our next question.
Comes from the line of Michael Perito with K BW you May proceed.
Hey, good evening guys.
Hey, Mike.
I wanted to just spend a second on the deposit side.
With rates moving higher I know you and some of your competitors every partnership is kind of built differently right and I just wanted to kind of rehash would potentially set to move higher here.
What if any kind of.
Pull through to your partners there needs to be as rates move higher on the deposit cost side I don't believe that theres much but I'm sure you've had some new partners that have grown since 2015, I just wanted to kind of hash that out real quick.
Yes.
Yes.
Yeah, I was going to say, we have a little bit of it but I mean.
I think the.
And then perspective, we have Ian going forward as we renew these contracts is growing less and less of that there is a little bit of it in there and you'll see it.
It usually has to get to a certain level, but.
We're still going to have as rates move up.
One of the lowest cost of funds in the industry.
Got it okay.
And then on the just kind of on the fee side of the equation here I mean, do you guys kind of alluded to some non deposit oriented kind of opportunities I guess, if I heard you correctly.
The banking as a service arena.
Wondering one if you can maybe be a little bit more specific around that is that sponsored credit card is that other kind of true lender arrangement things of that nature number one and number two.
We think it is primarily as a.
Our fee oriented type opportunity for you guys, where if there were type of lending arrangements you'd be interested at a certain point and kind of selling those products, where you could sell them to generate piece not grow the balance sheet or where how do you guys think about that dynamic.
Well I'll take the high level on this and then maybe Glenn you can talk about just a little bit but.
Our focus and this is a big differentiator for US is to focus on that fee income service income noninterest income line and that's that's a differentiator for us from other banks.
Whatever we're doing involved in in the banking as a service is going to be about driving that out now any of those specific ones. Glenn do you want to comment on any of those.
Yeah.
It's really both sides of the balance sheet Mike.
Quite frankly, our near term opportunities to drive fee income is.
Is likely on the payment side, where we can use.
Our technology our infrastructure.
Round money movement.
To do that with.
With more real time payments virtual payments.
Our relationships.
Terry.
Hi deposits long.
<unk> float with them. So we'll continue to have our deposit business and we're full on that but.
We can use those the same skill sets.
Two to serve other applications and payment space and then youre right on that.
Credit space, that's a little bit of the consumer credit.
We will over time do more of that.
Most of it we will not retain the risk.
But drive that more towards.
Our fee business.
At banking as a service or Brett and Anthony you talked about.
Think about.
Those large partners with great distribution, the broadest the deposit accounts.
Their customers also have more banking needs and just a deposit account.
And allowing them to compete against some of these neo banks and other fintech that are starting up that we're also serving.
That's where you see.
More than one solution banking as a service provider we think.
Are those that will win in the future.
Helpful. Thank you and then just lastly for me on that.
I think Anthony alluded to the.
The initial read on the tax season, I know, it's early but I guess anything structurally or environmentally that that you think could maybe.
Impact of tax season, similar to kind of like last year. So other years prior where there are various things that kind of pushed up out.
Or perhaps you know.
Refund advance volume or demand or rather I'm, a little softer just with the stimulus played out my guess is on the refund advance side. That's probably you guys are budgeting, a little bit higher but just curious if you guys could spend a minute to comment on the upcoming tax season anything we should be mindful of that that you guys are looking at that could potentially impact the recognition for <unk>.
The use of credit et cetera.
Yes. This is Anthony as you alluded to it's early and our tax season.
Last year.
Things got a late start but this year the tax season started on time for us.
And so so.
So far we believe that we are positioned.
For a good tax season, but again its early we don't see anything environmentally happening or or through any other external factors that at least today that are going to impact the tax season, as we may have had last year.
But yeah, we feel.
<unk> about the season this year.
Okay.
Got it very good. Thank you guys I appreciate it.
Thank you Michael.
The next question comes from the line of William Wallace with Raymond James You May proceed.
Hi.
Thank you.
Maybe just to follow up on the expenses Glenn you said, we look at the kind of the core expense base.
Side of cash in outside well spent for the rebranding that I believe you said that.
Do you expect there will be pressures.
Could you help maybe quantify that we're seeing wage pressures anywhere from $5 six 7%.
Ross the industry.
There is tech investments going on in the pressure that you guys are trying to stay front and center on that just kind of help us quantify what you mean by pressures. So that we can get a better sense of where the expenses might be telling.
Yes.
We're not immune to any of that.
And certainly the investments we made last quarter.
<unk> helped us.
Jumping off point here for.
Fiscal year 2022.
We continue to make investments in technology.
We're paying out of our current run rate.
There is always demand for more of that well.
We'll manage that.
Within our group.
Current business.
Where are we in that really hasnt changed for us.
Always been a company.
And at least I was just wondering the payments.
10 years ago needed to keep investing in technology.
Where we're seeing like everyone else is more pressure in compensation.
In.
So so it's a competitive market out there.
And part of the reason.
One of our three strategies is focused on.
Efficiency and simplification is so we can gain that productivity.
Elsewhere and.
Sure.
Be able to be competitive in the <unk>.
Irene environment.
Okay.
Moving on then this afternoon I believe I saw a press release that freedom financial.
That's.
Roughly $230 million securitization of loans originated on their platform by you and cross River.
Is that the type of credit sponsorship opportunity that you're referencing and what are those on said how long do they said just kind of maybe give us a sense of that specific relationship and how that fits into and maybe some of the commentary around the sponsorship.
Sponsorship side of banking as a service that you all have been discussing Tonight.
Yes, yes.
One of the models are.
Very efficient.
Freedom already had a securitization platform.
Sure.
It's well established.
So those loans sit in our in our consumer finance bucket.
And.
The most recent loans are not very long as Youre building up in essence, using our balance sheet and the cross rivers is as a warehouse facility until.
It gets to the.
<unk> size for free in both size and market conditions for freedom to execute a securitization.
As you can imagine there is plenty of protections and guardrails around that so that's a terrific example of some of the things we may do with consumer lending.
Not always.
Be that exact profile of who brings what to the table.
But the different components of.
The consumer loan programs are with them within that example.
It seems like Theres a.
A bit of a shift going on.
With a lot of fin techs that are.
Trying to figure out ways to provide credit and partnership with banks. How fast are you guys running to keep up with that and B.
On the forefront.
In your view when might we see.
Maybe some material.
Just on the loan side of the <unk>.
<unk>.
Yes. This is Anthony we're certainly aware of the evolution of that in the market.
And as we think about our future strategy around this.
Like everything else, we're going to take take a measured approach.
And ensure that we were doing it in a way that fits within our three pillared strategy.
But we are certainly looking at those opportunities and are aware of that those opportunities are growing in the marketplace.
Okay.
And then on the spruce accounted H&R block.
Launched with.
With you guys on the backend is this like the Holy.
<unk>.
Product set our product offering to their customer base that there'll be selling in during the tax season or is this kind of like a tack on its similar to other products that <unk> offered in prior years.
Yes, I don't want to speak for H&R block, but we do know that it's a mobile banking opportunity to help consumers reached our savings goals, which offers some unique offerings.
Through H&R block.
Proud of that partnership because it fits within our mission of enabling financial inclusion.
As it relates to.
<unk> strategy I think it's just the evolution that we've been talking about.
As it relates to banking as a service and providing more offerings and opportunities for consumers.
Okay.
Last question on the EAP program are there any deposits left on your balance sheet and if so can you quantify that.
Yes.
I would say there is there's very little left from VIP.
Child tax credit piece, there's still some of those with some of our partners those are not direct or indirect.
Right.
Okay.
Hey, guys. Thanks for the time I appreciate it yes.
We actually disclosed that numbers.
Yeah.
There are only $28 million of those on our balance sheet.
Some are off balance sheet.
We're obviously.
Master servicer for those.
Sorry, I missed the disclosure, but thanks for.
No I understand that.
Released just out so wouldn't expect you to see all of that.
That's all I had I appreciate it John yes.
Thanks Wally.
Thank you Mr. Ravi.
And that concludes the <unk> financial group first quarter fiscal year 2022 investor call.
Okay.
Okay.
Yeah.
Uh huh.